Sources of Financing

The most common sources of biodiversity funding are (a) traditional financing through government budgets (especially for protected areas), (b) direct community action and private-sector financing of conservation, (c) grants through the Global Environmental Facility (GEF), ODA from bilateral donors or international NGOs, (d) debt swaps, (e) development loans by multilateral entities with conservation components, and (f) funding based on payments for environmental services such as water, forest products, ecotourism, and mitigation of global climate change that also benefit biological conservation. The following are explanations of each source of funding:

a) Government Budget Financing

With the modernization of the state and privatization, the governments have fewer and fewer resources for managing natural resources, as in parks. Even though biodiversity is generating revenue, such as user fees, fines for infractions of the law, etc., these revenues have generally been directed to the central Treasury and have not been earmarked for conservation and development of the natural resources that generate them. However, only recently income captured from payments for environmental services or taxes from the use of the resources —both renewable, such as forests and fisheries, and nonrenewable, such as oil— are being directed to conservation.

b) Direct Community Action and Private-sector Financing

With the increased environmental consciousness, local communities are self-financing protected areas (mostly for recreation) in many countries in the region, in both rural and urban areas. Wealthy citizens are establishing more and more private protected reserves. Commercial enterprises are supporting conservation efforts as part of an image-building effort. For financing the management of urban green areas, environmental-cause-related advertising is becoming an important source (Sorensen et al., 1998). Chile is actively promoting private sector management contracts and concessions in its national parks (Hardner and Rice, 1999).

If the private sector can become a full partner, then the world could see a new era of conservation, an era in which civil societies have the will and the means to assume an effective stewardship over their own resources, including biodiversity (IDB, 1997).

c) Grants Through GEF, International NGOs, and Bilateral Donors

GEF has been the principal financing mechanism based on international agreements. However, it has been criticized for its slowness, and for its lack of inclusion of regional development banks as a financing conduit. The international environmental NGOs have been a formidable source of funding of biodiversity-related projects in Latin America, but some may not be as strong financial sources as they used to be. The bilateral donors have also lost their relative importance as a source of biodiversity funding. Owing to budget restrictions, the amount of the grants they provide has not been growing.

Targeted grants are especially useful sources of funding for biodiversity in the design stages of projects when other sources of capital are prohibitively expensive or simply not available. NGOs and community-based organizations (CBOs) have increased their involvement in designing and implementing programs that deliver environmental goods and services financed by such grants. An example of a successful grant instrument is the United Nations Development Program’s Small Grants Program (SGP) for GEF. Launched in 1992, the SGP was created to focus on community-based activities addressing global environmental challenges, mostly implemented through NGOs. Through mid-1995 the three-year pilot phase brought financing of a total amount of US$16 million (NC-IUCN and Trans-Global, 1998).

The international NGOs have been very active in financig conservation projects and sustainable community development programs in Latin America. They also participate in the preparation of projects for financing by other entities. An example of coordinated effort between NGOs, bilateral agencies and regional development banks can be found in Petén, Guatemala. The government had prepared an integrated development plan for the region with the financing of KfW (Development Bank) of Germany. This agency then proceeded to finance new protected areas and archeological sites in the region. USAID has been financing the management of existing protected areas with the help of some major international NGOs such as CARE, The Nature Conservancy, Conservation International, and several national NGOs. In addition, IUCN established a natural resource management project in the area. Recently, other bilateral donors, including DANIDA, FINNIDA, the Spanish Government, and the European Commission have financed natural resource management activities as well.

Currently the IDB is a major source of fresh funding in the region through the Sustainable Development Program in Petén. The components incorporate land titling, restoration of archeological sites, supporting strategic protected areas and low-impact tourism with local communities, pilot projects in sustainable forestry and agriculture, and institutional strengthening of local entities (NGOs, CBOs, municipalities, and government agencies). This loan program was designed on the basis of the integrated development plan through a process of community consultations and with the participation of the previous donors.

d) Development Loans with Biodiversity Components

Biodiversity components in rural and urban development programs have been the most common way for the IDB to finance conservation. For example, protected areas have been established as a mitigation measure for possible negative impacts of road projects; watershed-management programs have integrated both productive and conservation investments. Urban development projects include increasing investments in the management of green areas (Sorensen et al., 1998). Figure 1 shows an approximation of the distribution of biodiversity-related lending of the IDB the last 10 years (Keipi and Sitja, 1998).

e) Payment for Environmental Services

Arguments for public intervention in watershed management decisions have been made based on market failure. Farmers upstream do not necessarily choose environmentally desirable investments to protect downstream populations from damage, because it may not be profitable; therefore, compensation may be needed to induce environmentally more benign practices by financing them with income generated downstream (Hueth, 1995). Water-user fees and tariffs that, in addition to covering water distribution costs, would also pay for watershed management are contemplated in San José, Costa Rica. The government is considering charging the water company approximately US$6 million and the national power company US$3 million per year to finance upstream watershed management. These fees would be used to finance the conservation of some 1.3 million ha of forest in the watersheds serving the city (McNeely, 1997).

In Colombia, a law requires the electric power companies to transfer 2% of their gross sales to direct investments in watershed management or to environmental authorities. Several studies have pointed to the successful and effective use of these resources in forest conservation and the restoration of degraded areas (Gaviria, 1997).

FIGURE 1

Another example is the establishment of the Watershed Protection Fund initiative in Ecuador with the help of The Nature Conservancy. The main sources of financing are the users of water, such as the Sewage and Potable Water Enterprise of the city of Quito, the electricity companies ElectroQuito and INECEL, and private users of water. They are represented on the board of directors of the fund together with NGOs and the Government (TNC, 1998).

Another example is the establishment of the Watershed Protection Fund initiative in Ecuador with the help of The Nature Conservancy. The main sources of financing are the users of water, such as the Sewage and Potable Water Enterprise of the city of Quito, the electricity companies ElectroQuito and INECEL, and private users of water. They are represented on the board of directors of the fund together with NGOs and the Government (TNC, 1998).

Other methods, such as moral suasion through environmental campaigns and direct regulation, are also used to protect watersheds. However, taxes and fees that finance important environmental services are a way to assure that the activities of conserving the natural resources that provide those services are effectively funded.

Latin American countries have well-developed systems of forest products. Repetto and Sizer (1996) boldly state that for many forest-rich countries, “there should really be no need to seek innovative sources of finance for investments in sustainable forestry and conservation of the resource, since the forestry sector should be self-financing.” They claim that many governments could amass substantial funds if they collected the rents as proprietors and landowners. The payers would be the concessionaires and other commercial interest groups that exploit the public forests. The payments would consist of stumpage royalties, other types of fees, and taxes. A set of policy reforms is recommended by Repetto and Sizer to facilitate private-sector investments in sustainable activities and to provide funding for government investments.

In Colombia, the government recommends that stumpage fees be the same for forest products from both public and private lands. However, regional differences could exist on the basis of, among other things, ecological factors (Gaviria, 1997). The payments might be collected not only for wood products but also for non-timber products, as the National Council for Protected Areas (CONAP) is doing in Guatemala. Hunting and fishing licenses on public lands are another potential source of funding. In Brazil, the transfer of fishing licencing to private entities has greatly increased government revenue (Dourojeanni, 1997).

Even if the government is collecting revenues from these activities in forestry, fisheries, and wildlife, earmarking them back to environmentally beneficial actions may be hampered by the prevailing policies of the countries to direct most of these revenues to the central coffers of the Treasury. Where the money is returned to the sector, it may or may not depending on the fiscal policy, be used for investments in the areas where it was collected.

Ecotourism investment on both private and public lands has become big business in the region. Costa Rica is a successful case of promoting ecotourism: one of every four tourists visiting the country could be classified in this category. The overall foreign-exchange receipts from tourism were US$623 million in 1994, higher than from bananas sold overseas (US$522 million) or coffee exports (US$500 million) (Southgate, 1997). But the Caribbean countries, Argentina, Brazil, Colombia, Ecuador, and others are following suit. Chile is considering major changes in its policies in order to provide long-term, 30-year concessions of protected areas. The contracts would guarantee the conservation of the leased areas while part of the income generated from these concessions could be used to finance improved management of other state-owned areas (Hardner and Rice, 1998).

Visitor fees for ecotourism are a very straightforward way to finance the conservation and management of parks and other protected areas with public access. Charging different fees according to visitor origin and other characteristics (with and without vehicles, large groups, etc.) is common in the region (e.g., Secretaría Nacional de Turismo, 1994; Southgate, 1997). The principal objective of fee differentiation is to maximize park revenue based on tourists’ capacity to pay.

Concessions for tourism-related operators and different types of permit fees (for example, for filming in protected areas) are other sources of income. Differentiated airfares and hotel fees achieved via special taxes for international tourists are common (e.g., Belize, Guatemala, and Ecuador). In Costa Rica, the income from entrance fees to parks increased dramatically after the park system was allowed to retain 75% of the income collected, which greatly improved their financial sustainability (Brandon, 1996).

Managed Latin American forests generate important global environmental services. However, their conservation and management for the common good costs money. Therefore, it has been recommended that the Northern industrialized countries benefiting from these services should also pay for them (López, 1996). As a complement to the traditional, but dwindling, multilateral and bilateral sources of financing for natural resource conservation, several innovative international public financing mechanisms have been proposed in recent years to pay for the global environmental services provided by forests (e.g., Panayotou, 1995). Their use is a political issue. There is no world government to raise global taxes, although proposals abound on what items could be taxed: international trade in forest products or non-renewable natural resources such as petroleum, or activities that use gasoline products such as air traffic, various luxury goods, etc. The challenge is to find ways to ensure that those receiving global benefits also pay at least part of the cost of conserving the natural resources that provide them (McNeely, 1997).

The use of green taxes based on carbon sequestration has been widely discussed. Most carbon emissions are generated by the industrialized world without compensation for the negative externalities to other countries. Many of the Latin American countries have forests as carbon sinks and are creating plantations that sequester carbon from the atmosphere, hence the idea of having industrialized countries finance forest conservation in Latin America (WCFSD, 1996). López (1996) has estimated that conserving 650 million ha of the remaining Amazon forest has a probable net annual benefit to the world from carbon sequestration of US$69.2 billion. López analyzes current sources of financing such as GEF and the Brazilian Tropical Rainforest Trust Fund financed by the Group of Seven countries, underlining that these are insufficient to compensate for the estimated US$6.5-US$10 billion annual cost of conserving the Amazon.

The Kyoto Protocol and the negotiations of the Fourth Conference of the Parties in Buenos Aires in November 1998 may facilitate the use of the Clean Development Mechanism and trading of Certified Carbon Offsets (CTOs) as an important opportunity for Latin America and the Caribbean to capture funds that may also benefit biodiversity conservation. As Figure 2 shows, the average price of carbon increased from about US$8 a ton before the Kyoto agreement to about US$12 afterwards. At the same time the investments committed to forests as carbon sinks rose from some US$20 million to some US$350 million. Figure 3 shows that the area of forests affected by these post-Kyoto projects rose to about 20 million ha even though there is much uncertainty about the future implications of the Protocol (Moura Costa, 1998).

Figure 4 shows the Costa Rican model form capturing financial resources for a Forest Fund from CTOs. However, since CTO trading is still at an initial stage, the most important source of financing for the Forest Fund is a tax on gasoline. The Fund may invest both in conservation and in management of natural forest and may have an important impact in preventing deforestation. Plantations may also be financed to restore degraded areas (MINAE, 1998).

Table 1 indicates that the cost of stabilizing U.S. carbon emissions with trees would be only about 20% of the cost without trees, which is an additional reason for the Costa Rican strategy of pursuing CO₂ reductions through carbon-sink programs (MINAE, 1998).

Conservationists have long cited the untapped potential of rain-forest species for yielding useful drugs as a reason for saving them (Vogel, 1997). Within the last few years, a number of partnerships have been formed to try to develop markets for new drugs derived from natural compounds. Three models can illustrate how bioprospecting is evolving.

FIGURE 2
FIGURE 3
FIGURE 4

The first model is illustrated by the now-famous collaboration between Merck and INBio (Sittenfeld and Gámez, 1993). Their agreement gives the international drug company access to material from which compounds are extracted and screened to see whether they have useful properties. This model has some serious shortcomings, such as the very low rate of royalty to the country of origin. This would return significant income to a country only in the event that a drug company discovered a “blockbuster” drug with wide demand and a high price. And even if income is generated, it would have no direct link to the lives and livelihoods of people living in the forests.

A second model, by the Shaman enterprise, improves on some of these shortcomings. Shaman has raised more than $100 million in capital and has taken out patents on two drugs, which are now in clinical trials. A key feature of Shaman’s approach is to focus on drugs from species that indigenous peoples believe to be efficacious. A second feature is that Shaman pools risk and profits among all its indigenous cooperators. Shaman has also established the Healing Forest Conservancy, a non-profit organization that will channel a portion of the profits directly to cooperating indigenous peoples. However, like more traditional drug companies, Shaman considers the exact percentage to be paid in royalties to be a corporate secret (McNeely, 1997).

A third model is offered by Andes Pharmaceuticals. Andes, like Shaman, is dedicated to bioprospecting in cooperation with indigenous peoples. The Andes approach builds capacity to screen biological materials for useful drugs in the country of origin of the material being tested. Andes has signed agreements with several South American universities and NGOs to transfer state-of-the-art screening technology. The country would benefit from the institution-building. Moreover, because a domestic entity would hold the patent, a much more substantial percentage of the ultimate value of the drugs (rather than a 1 or 2% royalty) would stay in the country (McNeely, 1997).